Where is the Housing Market?

The Mortgage Corner

Housing construction surged for the first time in almost one year—but it was in apartments, as single family home construction has to compete with existing home inventories bloated by the burst housing bubble. Total housing starts were at 596 thousand (Seasonally Adjusted) in January, up 14.6 percent from the revised December rate of 520 thousand, and up 25 percent from the all time record low in April 2009 of 477 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959).

But single-family housing starts in January were 1.0 percent below the revised December figure of 417,000. While the January rate for units in buildings with five units or more was 171,000, signaling that demand for rental units is rising, as vacancy rates fall. Those who have lost their homes and newly formed households have to live somewhere, in other words, if they can’t or won’t buy a home. And something like 1 million new households are still being formed per year.

So rental vacancy rates have been falling from a high of 11 percent since the end of the Great Recession to just above 9 percent. And this is reflected in rising rents, which is spurring the increase in apartment construction. In fact, rental units and condos are the only housing sectors growing nationally at present.

Existing-home sales have also been surging of late, and their inventory levels have dropped to an 8-month supply, which is still too high. Historical supply rates have ranged from 4-6 months. In fact, it wasn’t until 2005 that inventory levels began to surge above their long term 4-month average.

But the bottom line is how many units are completed, which tells us how many are on the market and competing with the excess of existing home inventory. Multi-family starts seem to be rebounding in 2011, but completions will probably be at or near record lows since it takes over a year to complete most multi-family projects. Single-family starts will probably stay low until the existing-home inventory declines substantially.

And we believe that it will take the rest of this year for the existing-home inventory to drop sufficiently to spur new single-family home construction. Why? Growing and pent up demand from new household formation will eventually bring down available inventories, as will a better jobs market that brings down the foreclosure rate. History shows that housing construction and job formation seem to go together.

Harlan Green © 2011